Continuing the schizoid overnight theme, we look at Germany which just
sold €3.9 billion in 6 month zero-coupon Bubills at a record low yield
of -0.0122% (negative) compared to 0.001% previously. The bid to cover
was 1.8 compared to 3.8 before.

As per the FT: "German short-term debt has traded at negative yields in
the secondary market for some weeks with three-month, six-month and one-year
debt all below zero. Bills for six-month debt hit a low of minus 0.3 per
cent shortly after Christmas...The German auction marks the start of another
busy week of debt sales across Europe. France and Slovakia are also selling
bills on Monday, with Austria and the Netherlands selling bonds on Tuesday.
Germany will auction five-year bonds on Wednesday, while Thursday sees
sales of Spanish bonds and Italian bills. Italy finishes the week with
a sale of bonds on Friday."

Still the fact that the ECB deposit facility, already at a new record as
pointed out previously, is not enough for banks to parks cash is grounds
for alarm bells going off: the solvency crisis in Europe is not getting
any easier, confirmed by the implosion of UniCredit which is down now another
11% this morning and down nearly 50% since the atrocious rights offering
announced last week. On this background Germany continues to be a beacon
of stability, yet even here the consensus is that recession has arrived.
As Bild writes, according to a bank economist survey, Germany's economy
is expected to shrink in Q1, with wage increases remaining below 3%. And
as deflation grips the nation, potentially unleashing the possibility for
direct ECB monetization, look for core yields to continue sliding lower,
at least on the LTRO-covered short end.

And big European banks are borrowing from their corporate customers rather
than lending to them:

European banks have found a new way to bring in cash. They borrow it --
but instead of turning to each other to bring in funds, they are borrowing
it from companies that were once happy to deposit their excess cash in
exchange for interest. Worries over the eurozone crisis have hit both the
banks and their former depositors, and now both have worked out a new arrangement
that seems to satisfy them both -- at least for now.

Reuters reported Monday that banks, wary of borrowing from one another
or a central bank over debt fears, have begun negotiating secured lending
arrangements with companies flush with extra cash -- which, instead of
receiving a regular unsecured interest payment in exchange for their money,
now insist on collateral and other measures in so-called repo deals or
short-term secured lending.

While companies themselves are reluctant to talk about such measures, one
source said that in one specific category of lending, companies account
for 25% of these deals. Very large companies with an abundance of cash
are typically the ones that will execute such arrangements. Johnson & Johnson,
Pfizer and Peugeot are reported to be among them, as some of the most recent
entrants into the repo field.

These two events are clear signs of a stressed system. But they're not an
immediate threat to anyone's portfolio. That will come when the peripheral
Euro-zone countries start refinancing their sovereign debt. On Thursday and
Friday, for instance, Spain and Italy have to convince the markets to lend
them a total of almost 20 billion euros:

MADRID, Jan 12 (Reuters) - Spain will provide 2012's first real test of
demand for debt from the euro zone's bruised periphery on Thursday when
it sells around 5 billion euros ($6.39 billion) of bonds.

Italy will also venture into markets with a short-term debt sale before
embarking on this year's massive campaign of bond issuance at an auction
on Friday.

The two countries are among weaker euro zone states scrambling to convince
markets they can slash their deficits while somehow also stimulating growth
and creating jobs and are seen as especially vulnerable should the debt
crisis escalate.

Spain's Treasury will auction a new three-year benchmark bond and reopen
two bonds each maturing in 2016, in a sale that is expected to attract
substantial support from domestic banks flush with European Central Bank
cash.

"The massive size of the three-year lending from the ECB reinforces the
view that auctions should be supported by domestic investors," said BNP
Paribas strategist Ioannis Sokos.

A Treasury bill sale will meanwhile give Italy a first taste of investors
sentiment before it auctions up to 4.75 billion euros of bonds on Friday.

Rome is scheduled to sell 8.5 billion euros in 12-month BOT bills and 3.5
billion euros of bills maturing at the end of May.

Italy must refinance more than 90 billion euros of longer-term bonds falling
due between February and April, and with no end in sight to the European
debt crisis, its bonds remain under intense pressure, with yields at levels
viewed as unsustainable.

The European Central Bank has pumped so much liquidity into the system that
this week's debt sales will probably succeed without rattling the markets
too much. But that 90 billion euros Italy has to roll over between February
and April will make every day a new adventure.

John Rubino is author of Clean Money: Picking Winners
in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's
James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday,
January 2008), and author of How to Profit from the Coming Real Estate
Bust (Rodale, 2003). After earning a Finance MBA from New York University,
he spent the 1980s on Wall Street, as a currency trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and
a frequent contributor to Individual Investor, Online Investor,
and Consumers Digest, among many other publications. He now writes
for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.